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Public pension 'spiking': No one's monitoring overtime spiking in Minnesota

By MaryJo Webster and Christopher MaganPioneer Press

Posted:
12/08/2012 12:10:46 PM CST

Updated:
12/08/2012 08:36:16 PM CST

It's unknown how many public employees are spiking their pensions by working huge amounts of overtime.

The problem is that no one is watching.

And that lack of oversight means it is also unclear whether there's any financial impact on Minnesota's public pension funds.

Some experts say it's become a pervasive problem nationally, at least among public workers who have the ability to work overtime in their final years before retirement.

"It angers those who are playing by the rules," said Ed Siedle, a Florida-based lawyer who has been dubbed the "pension detective" for his work uncovering abuse and fraud.

In Minnesota, the three statewide public pension funds -- which cover about 485,000 current and former city, county, state and school workers -- look for sudden, large increases in each person's total salary, but they don't look specifically at overtime.

"I don't know how much spiking there is across the plan," says Mary Vanek, executive director of the Public Employees Retirement Association, or PERA. "While we haven't identified it as a significant problem, we know of plenty of individual cases."

PERA includes the St. Paul Fire Department, where a Pioneer Press analysis of salary data found some supervisors have clocked hundreds of hours of overtime each year, raising their pension benefits.

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More than a dozen other states have recently passed legislation to prevent public employees from steeply raising their salaries during their final years on the job through overtime or other forms of special compensation such as payouts of unused leave.

Vanek said her office has begun looking into the issue, partly in response to questions from the Pioneer Press and partly because of the national attention.

Last month, Vanek provided the PERA board with a packet of information about what other states have done to curb spiking.

Unexpectedly high salary increases in the final years of service puts unknown financial stress on pension funds that millions of retirees are banking on nationwide, Siedle said.

Taxpayers, who are ultimately responsible for any pension shortfalls, "do not have effective oversight," he said. "It's important because it is part of the reason why a number of these plans are on the verge of collapse across the country."

OVERSIGHT

Minnesota has been a leader when it comes to tackling pension abuses that put undue liabilities on its public pension funds.

Already, state rules prohibit things such as bonuses, sick leave payouts and other perks from being included in the average salary used to determine pension benefits.

Siedle says spiking is hard to uncover and harder to stop because the pensions often are left to police themselves. There are few federal regulations, leaving states to design their own rules for oversight.

That doesn't happen in a vacuum. Unions with a lot of political muscle also can make it tough for lawmakers to strengthen the rules, Siedle said.

Meanwhile, most pension funds work to keep much of the information about individual benefits and how they are calculated shielded from public view, he said.

Minnesota is no exception. The state's public records law allows pension funds to release only a pension recipient's name and monthly benefit and whether it is a retirement or disability benefit.

Key details are not public, including where the person worked, when he or she retired, years of service and the "high five" salary average. That makes it difficult for the public to match pension records to historical salary records to find evidence of spiking.

The more than 2,000 employers, mostly municipalities, that participate in PERA simply report each person's eligible salary after each pay period.

Then, at the end of a person's career, PERA looks for the 60 highest consecutive months and averages those salary amounts. This average then factors into a pension benefit calculation that also takes into account years of service and whether the person has reached official retirement age.

SMALLER FUNDS AT RISK

Experts say someone would have to work large amounts of overtime across all five years in order to significantly increase their pension. Police and fire workers tend to have the most opportunities.

Larry Martin, executive director of Minnesota's Legislative Commission on Pensions and Retirement, noted that a handful of people, or even a whole department, spiking their pensions is not enough to cause financial problems for a large, statewide pension fund such as PERA, which serves about 240,000 current and former employees.

But the whole system hinges on complex actuarial assumptions that estimate how much the fund needs in the future by looking at things such as typical salary increases over a person's career, average retirement age, how long people will live and other factors. Contribution amounts from employers and employee paychecks can then be adjusted based on those assumptions.

Spiking could upset that balance.

"If you suddenly have a really sharp increase (in salary) that's so different from the rest of your career, and if that (final average salary) is artificially inflated, then you've upset the funding level and you haven't funded for that liability," said Diane Oakley, executive director of the National Institute on Retirement Security.

Smaller pension funds are at greater risk. One recent example is in Fort Worth, Texas, where the city runs its own pension fund. An audit a few years ago found 25 percent of that fund's unfunded liability was due to overtime.

In October, the city council eliminated overtime from pension benefit calculations for new hires in the police department, replicating a measure approved last year for other municipal employees, said assistant city manager Susan Alanis.

The police officers union, though, has filed a federal lawsuit trying to rescind the measure.

FUND SHORTFALL

PERA has talked with unions about limiting how much salary growth could be included in the pension formula as part of a larger discussion to stabilize the fund that covers most police and fire workers throughout the state.

The PERA police and fire fund, with about 20,000 working or retired members, paid out about $342 million in benefits last year. But the contributions coming from employers and employee paychecks cover only about 80 percent of what's needed to pay benefits, administrative costs and debts.

PERA and union representatives reached an agreement last month, which would need legislative approval, to shore up the fund through contribution increases, limits on retirees' cost-of-living increases, stronger penalties for early retirement and other changes. If PERA's board approves the plan at its meeting Thursday, Dec. 13, it would probably be introduced at the Legislature in January.

Vanek said her office needs to do more research before proposing any changes that would limit pension spiking. For starters, Vanek said, they need to find out how common the practice is and how much, if any, financial impact there has been.

In addition, Vanek said, there are many options for curbing spiking, including prohibiting overtime or limiting how much can be included in the average salary or charging back to employers any portion of the benefits that were unfunded because of spiking.

"The (PERA) board is not going to make a policy decision that is a sea change of this magnitude without having a lot of information," Vanek said.

Chris Parsons, secretary of the International Association of Fire Fighters Local 21, said he and others from his union have met with PERA, and his union likes the idea of limiting overtime because it wants a "balanced approach."

Patrick Smith, president of the Fire Supervisory Association, a union that represents supervisors in the St. Paul Fire Department, said his group also wants to stabilize the fund.

"We're willing to sit down and discuss any issues that are going to keep the fund stable well into the future," Smith said.

CALCULATIONS DIFFER

About 15 other states have passed anti-spiking legislation in recent years, tightening what can be included in the average salary calculation and changing how many years are included. Three-year and five-year averages are now the norm. Illinois and Florida recently introduced eight-year averages. But not all states require the years to be consecutive.

"It's not as easy as one might think to eliminate the opportunity to spike a pension benefit," said Keith Brainard, a research director for the National Association of State Retirement Administrators. Some states have been working on the issue for several years.

Most states have been able to attach anti-spiking legislation to larger legislative packages intended to bolster struggling pension funds.

California's pension reform, signed into law in September, eliminates from the pension calculation all overtime, bonuses, payouts for unused leave and severance pay for employees hired in 2013 or later.

Other states have limited the year-over-year increase in salary that can be applied to the pension calculation.

Vanek noted that any changes in Minnesota won't be possible unless PERA and the police and fire unions come to an agreement before taking it to the Legislature.

Martin, who heads up the legislative pension commission that would be the first to look at any proposal from PERA, said changes to the pension laws in Minnesota are tough to make.

"There either has to be a situation that the consequences of the problem are so dire that it has to be addressed," Martin said, "or there has to be a lot of political will."